Asia stocks stuck as rate cuts ring China alarm

The yuan dropped to its lowest in 9-1/2 months

SYDNEY (Reuters) - Asian stock markets wallowed at one-month lows on Tuesday and the yuan struggled as China cut interest rates as another round of disappointing data underscored its economic malaise.

Cuts to China's one-year loans to financial institutions, at 15 basis points, were the largest since the outset of the COVID pandemic. Industrial output and retail sales growth both slowed from a month earlier to a year-on-year pace of 3.7% and 2.5% respectively, missing expectations.

The yuan dropped to its lowest in 9-1/2 months, and sources told Reuters that China's major state-owned banks stepped into the spot market to steady the currency. After that, it hit 7.2743 per dollar, having been as low as 7.2875.

The Australian and New Zealand dollars steadied as well but remained uncomfortably close to breaking below major support.

MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) edged down 0.1% to 509.12, not far from a one-month low made on Monday of 506.3 as worry about China's frozen property sector swept across regional markets.

Property investment, sales and fundraising extended their slide in July, the data on Tuesday showed. New construction starts by floor area are down nearly 25% year-on-year and highlight how there is neither the appetite nor funds to build.

"We believe the Chinese economy is faced with an imminent downward spiral with the worst yet to come, and the rate cut this morning will be of limited help," said analysts at Japanese bank Nomura as pain spreads outward from the real estate market.

"In our view, Beijing should play the role of lender of last resort to support some major developers and financial institutions in trouble, and should play the role of spender of last resort to boost aggregate demand."

Such hopes staved off steeper losses, though Hong Kong's Hang Seng (.HSI) fell 1% to within a whisker of Monday's one-month low.

Shares in Country Garden (2007.HK) bounced 5% to HK$0.83. The once-sound developer is struggling to make debt repayments and its woes are a chilling signal for the broader market. In January 2020 the shares traded at HK$13.

Chinese blue chips (.CSI300) fell 0.6% and investors turned to the safety of bonds, driving 10-year and five-year Chinese government bond yields to their lowest since 2020 at 2.56% and 2.35%, respectively.

With U.S. yields rising, the gap over Chinese yields at the 10-year tenor hit its widest in 16 years at 168.8 bps. China also said it would suspend publishing youth unemployment figures - not exactly a good sign, either.

JAPAN GDP JUMPS

China's weak data overshadowed a surprise in Japan, where tourism and car exports sent annualised growth surging to 6% in the second quarter, well above the 3.1% analysts had expected. That lifted the Nikkei (.N225) by 0.7%.

"The export news was heartening and bodes well for Japan’s continued trade competitiveness," said John Vail, chief global strategist at Nikko Asset Management in Tokyo, though he cautioned that domestic consumption indicators were soft.

The yen showed little reaction and hit a nine-month low of 145.60 to the dollar, capped as controlled Japanese yields leave a wide gap on rising U.S. yields.

In Australia, wages growth came in steady for the last quarter, just below expectations, and added to the case for a pause in interest rate hikes for the time being.

Hopes for stimulus in China helped Aussie dollar and the kiwi slightly higher but they both remain in a danger zone near support levels at June lows.

The euro recovered slightly from overnight losses to $1.0909.

Elsewhere Nasdaq 100 futures were up 0.3% in the Asia session. The S&P 500 (.SPX) rose 0.6% overnight and futures rose 0.2% in Asia. European futures rose 0.4%.

In bond markets, benchmark 10-year Treasury yields rose 2 basis points to 4.20% on Tuesday. Two-year yields were steady at 4.97%. Markets in Argentina and Russia were reeling from volatile sessions on Monday, when Russia's rouble fell past 100 to the dollar and Argentina hiked rates and devalued its currency after a shock election result.

Brent crude futures were steady at $86.30 a barrel.